Thursday, January 7, 2016

Romania holds rate but cuts RRR on forex liabilities

Romania's central bank left is benchmark monetary policy rate steady at 1.75 percent but cut its reserve requirement on foreign-exchange liabilities by 200 basis points to 12 percent in light of "slower forex loan dynamics and in order to continue the harmonization of the reserve requirements mechanism with the standards and practices of the European Central Bank and the major central banks across the European Union."
The National Bank of Romania (NBR), which cut its rate by 350 basis points in 2015, added that the reserve requirements ratio (RRR) on leu-denominated liabilities remains at 8 percent.
The second part of Romania's two-step cut in Value Added Taxes took effect on Jan. 1, 2016 and this will push the inflation rate deeper into negative territory so it will first return to positive territory after the effects of the June 2015 VAT cut have faded, amid an easier fiscal policy stance and higher labour costs, the central bank said.
Romania cuts its VAT rate to 20 percent from 24 percent as of Jan. 1.
In its November inflation report, the NBR forecast that headline inflation would hit minus 0.7 percent at the end of 2015 and remain in negative territory until May 2016 before it turns positive and reaches 1.1 percent by the end of 2016 and then remains within the central banks variation band of 1.5 to 3.5 percent until the end of its forecast horizon.
Excluding the effects of the first round VAT cut in 2015, the central bank forecast headline inflation of 2.1 percent end-2015 and 2.7 percent end-2016.
At its next meeting on Feb. 5, the board of the central bank will examine a new inflation report.
Romania's consumer price inflation rate was minus 1.1 percent in November, the sixth consecutive month of deflation since June, but excluding the impact of the VAT cut, inflation would have been close to 2 percent, i.e. within the NBR's target range.
Romania's economic growth picked up speed in the third quarter of 2015 due to rising private consumption on the back of higher household income, a recovery in lending, lower indirect taxes and stronger confidence in the economy, the NBR said.
Romania's Gross Domestic Product rose by 1.4 percent in the third quarter from the second quarter for annual growth of 3.6 percent, up from 3.4 percent the second quarter. Excluding the agricultural sector, which was affected by a poor harvest, GDP hit a post-crises high of more than 5 percent.
The central bank currently sees the negative output gap closing during this year, implying more inflationary pressures as demand gradually builds up.
Strong growth, foreign exchange reserves of 32 billion euros at the end of 2015 and a current account deficit of less than 1 percent of GDP helped stabilize the leu's exchange rate despite swings in global risk aversion, geopolitical tensions and a diverging monetary policy stance among the world's major central banks, the NBR said.
The leu was quoted at 4.52 to the euro at the end of 2015, down only 0.9 percent on the year.

The National Bank of Romania issued the following statement:

"In its meeting of 7 January 2016, The Board of the National Bank of Romania decided the following:

Statistical data point to the annual inflation rate remaining in negative territory since June 2015, in line with the projection, as a result of broadening the scope of the 9 percent reduced VAT rate to all food items, non-alcoholic beverages and public food services and declining fuel prices.

In November 2015, the aggregate consumer price level stood 1.1 percent lower than in the same year-earlier period. The average annual inflation rate came in at -0.4 percent, while the Harmonised Index of Consumer Prices, which is relevant for assessing convergence with the European Union, averaged at an annual -0.3 percent.

However, statistical data analysis shows that, leaving aside the impact of lowering the VAT rate, the annual inflation rate would have run close to 2 percent, i.e. inside the ±1 percentage point variation band of the 2.5 percent flat target.

The faster economic growth in 2015 Q3 (3.6 percent) was stoked up by rising private consumption, amid higher nominal income of households, the lending recovery, lower indirect taxation and stronger confidence in the economy. Excluding the impact of the agricultural sector that was strongly affected by poor autumn harvest, gross domestic product growth stood at a post-crisis high of more than 5 percent.

At end-2015, foreign exchange reserves amounted to EUR 32 billion, similarly to the level recorded a year before, after making payments on public and publicly-guaranteed external debt service of about EUR 7.2 billion. The reserves were fuelled mainly by EU fund inflows and the government’s foreign borrowings. The current account deficit stood further at a sustainable level, namely below 1 percent of GDP, despite swifter increase in consumption, amid the improving services balance and larger transfers from the European Union, being entirely covered by autonomous inflows/direct investment.

These developments helped preserve a relative stability of the exchange rate of the leu versus the euro, which fluctuated within a relatively narrow range in 2015, even though foreign markets were marked by swings in global risk aversion, geopolitical tensions and the diverging monetary policy stances of the world’s major central banks.

Interbank market rates fell further, touching record lows, reflecting the policy rate cuts and adequate liquidity management. The accommodative feature of real broad monetary conditions helped leu-denominated lending to recover. Thus, the annual dynamics of credit to the private sector advanced into positive territory, solely on account of the faster growth pace of leu-denominated loans (stemming from new business and loan conversion). Loans in domestic currency have come to prevail, i.e. 50.9 percent of the loan stock in November 2015, compared with a 35.6 percent low in May 2012, ensuring improved monetary policy transmission and the prerequisites for managing risks to financial stability.

The outlook for the external environment is fraught with uncertainty surrounding the fragile growth of the global economy and international financial market volatility, whereas domestically the very fast growth of budget spending at end-2015 and the widening of the budget deficit during the projection horizon are a matter of concern.

Over the short term, the annual inflation rate going again deeper into negative territory is reconfirmed, following the new round of indirect tax cuts (the lowering of the standard VAT rate to 20 percent, from 24 percent, as from 1 January 2016). Subsequently, the annual inflation rate will return to positive territory after the effects of the VAT rate cut in June 2015 have faded out, amid an easing of the fiscal policy stance and higher unit labour costs. At the same time, it is noteworthy the persistence of risks and uncertainties associated with certain developments in the external environment as well as on the domestic front, i.e. primarily associated with the fiscal stance outlook and the structural reforms to be implemented in an election year.

Under the circumstances and based on the currently available data, the Board of the National Bank of Romania decided to keep unchanged the monetary policy rate at 1.75 percent per annum and to further pursue an adequate liquidity management in the banking system.

Furthermore, against the background of slower forex loan dynamics and in order to continue the harmonisation of the reserve requirements mechanism with the standards and practices of the European Central Bank and the major central banks across the European Union, the NBR Board decided to cut the minimum reserve requirements ratio on foreign exchange-denominated liabilities of credit institutions to 12 percent from 14 percent starting with the 24 January-23 February 2016 maintenance period. The minimum reserve requirements ratio on their leu-denominated liabilities remains unchanged at 8 percent.

The NBR Board decisions are aimed at ensuring price stability over the medium term in a manner conducive to achieving lasting economic growth and preserving macroeconomic stability.

To this end, a balanced economic and monetary policy mix, along with progress in structural reform implementation, is pivotal to preserving macrostability and robust economic growth in the process of achieving convergence with the European Union, as well as to enhancing the resilience of the Romanian economy to potential shocks or adverse conditions worldwide.

The NBR monitors both domestic and external economic developments with a view to securing the adequate use and dosage of all its available tools to fulfil the overriding objective regarding medium-term price stability and preserve financial stability.

In line with the preannounced calendar, the next NBR Board meeting dedicated to monetary policy issues is scheduled for 5 February 2016, when a new quarterly Inflation Report is to be examined."